The Difference Between Vested and Non-Vested Benefits

Your company might offer employees a 401(k) or some other form of retirement plan. That's great. If the company contributes to that plan, a vesting schedule should be in place. Vesting gives employees ownership over benefits according to the established schedule.

As a provider of payroll processing and benefits administration, we have come to understand that not everyone fully grasps what vesting is. This may be your experience. If so, you are in luck. This post will explain everything you need to know about vesting and employee benefits. By the time you are done reading, you clearly know the difference between vested and non-vested benefits.

The Merriam-Webster Online Dictionary defines 'vested' as follows:

"Fully and unconditionally guaranteed as a legal right, benefit, or privilege; e.g., the vested benefits of a pension plan."

The simplest way to understand vesting is to think of ownership. Any contributions your company makes to an employee benefits program are owned 100% by employees at the time they become fully vested. So if the vesting schedule says 100% ownership after three years, every penny your company contributes becomes the property of the receiving employee on his or her third anniversary.

Vesting and Retirement Plans

There are many kinds of employee benefits subject to vesting. However, the most common are retirement plans. 401(k) plans and pensions frequently offer vested benefits when employers contribute. This may be your experience with vested benefits.

As an employee yourself, you may contribute to your own retirement plan through a weekly pay deduction. Your company likely matches that deduction with its own contribution. Whether or not you have full ownership of the funds contributed by your employer depends on the vesting schedule. There are two kinds of schedules employees can work with.

The first is a cliff schedule. This kind of schedule takes effect after a certain number of years. The previous example of 100% ownership at the employee's third anniversary describes how a cliff schedule works. The other kind of schedule is a graduated schedule.

Under graduated scheduling, employee ownership of vested benefits grows over time. An employee might be 10% vested after the first year, 25% vested after the second year, and 100% vested after the fifth year.

Under this graduated schedule, an employee who left his job after the second year would only be entitled to 25% of the funds contributed by his employer. The remaining 75% would be returned. The only way that employee could get 100% of the employer contributed funds is to work through his fifth anniversary.

Non-Vested Benefits

The explanation of vested benefits should give you a clear understanding of what non-vested benefits are. If your company offered a 401(k) plan to which they did not contribute, that would be a non-vested benefit. Health insurance is another non-vested profit, even though the employer contributes to it. Why is it non-vested? Because there is no ownership of benefits involved.

In short, for a benefit to be vested, it must include both employer contributions and employee ownership of those contributions. The absence of either one makes a benefit non-vested. Hopefully our explanation makes sense to you.

BenefitMall can help you set up a vested 401(k) plan if you are looking to offer one to your employees. In addition to payroll processing, we work with a nationally known benefits provider to offer an innovative retirement plan that will allow you to take good care of your employees without breaking the bank.